Incomplete contracts and the boundaries of the multinational firm

Abstract

Using data on U.S. intra-firm and arm’s-length imports for 5,705 products imported from 220 countries, we examine the determinants of the share of U.S. imports that are intra-firm. We examine two predictions that arise from Antràs (2003), Antràs & Helpman (2008) and Antràs & Helpman (2004). First, we find that, consistent with the implicit logic of Antràs (2003) and the explicit predictions of Antràs & Helpman (2008), vertical integration is increasing in the importance of non-contractible headquarter inputs relative to non-contractible supplier inputs. In other words, we show that only non-contractible headquarter inputs affect the firm’s make-or-buy decision. Second, we also provide empirical support for the Antràs & Helpman (2004) prediction that intra-firm trade is largest where non-contractible headquarter inputs are important and productivity is high.